Michael Smith comments over at EconTalk on a comment by one Mark K (via Cafe Hayek)

Mark K wrote:

These jokers on Wall Street, who according to Russ made "˜innovative' products like credit default swaps, showed us unregulated free market capitalism in all its glory.

The notion that we have an "unregulated free market" is false.

If we had an unregulated free market, the organizations and individuals that made stupid investment decisions -- those "jokers on Wall Street" -- would now be bankrupt, to be replaced by more competent organizations and managers. Instead, under the current system, they are "bailed out" -- at your expense -- and allowed to continue operating.

If we had an unregulated free market, the investment rating agencies that rated securities containing subprime loans as "AAA" would be disgraced, bankrupt and out of business -- no one on earth would deal with them any longer -- they wouldn't be able to pay people to use their services. Instead, under our current system, not only are all those rating services still in business, the S.E.C. requires that all issuers of investments use those rating agencies.

If we had an unregulated free market, no one would be forcing bankers to make riskier loans than they wish to, as is currently done by legislation such as the Community Reinvestment Act and threats of lawsuits from organizations like ACORN and from the Federal Government"˜s Justice Department (Clinton"˜s DOJ filed 13 major lawsuits against banks for failure to lend to "minorities").

If we had an unregulated free market, there would be no central banking entity in charge of a fiat money supply with the ability to:

a) Make vast amounts of credit available at below-market interest rates.

b) Follow such a persistent policy of inflation as to convince virtually everyone in the country that purchasing a house is "a good investment".

c) Eliminate ( or at least significantly reduce) risk aversion by guaranteeing bankers that they (the Fed) will always be there as "lender of last resort".

d) Condone and make possible a preposterously over-leveraged fractional reserve banking system under which banks currently hold total reserves of only about 4% and are thus extremely vulnerable to any sort of a run or loss of confidence in the bank.

If we had an unregulated free market there would be no quasi-government entities like Fannie and Freddie and the FHA to insure that trillions of dollars of that cheap credit made possible by the Fed was directed into the residential housing market, producing an unsustainable boom in housing construction, which, when it ends, leads inevitably into an economic bust.

If we had an unregulated free market, the Federal Government would not now be contemplating looting the American taxpayers of another trillion dollars or so to pay off various special interests that helped the latest collection of looters get into power.

We don't have an unregulated free market. We have a "mixed economy", with a few elements of capitalism struggling under the weight of literally thousands of pages of rules and regulations and dozens of government agencies interfering in virtually every aspect of our economic lives.

And under this set-up, it is you, the "little guy", the individual who doesn't have a powerful lobby in Washington to get the rules bent in your favor -- you, who cannot command an audience with Congress to beg for your personal bailout -- you, who can do nothing as government uses your funds to save the incompetent and the dishonest from the consequences of their own actions -- it is you who gets screwed.

We don't have an unregulated free market; we have an out-of-control government intent on looting us blind.

Good post. One thing that no one points out is that the FDIC and it's absurdly under priced insurance is the biggest factor. If we didn't have the FDIC then people who want any yield would have to invest in funds that buy different products and there could never be the risk of a 1T institutional implosion.

Mesa Econoguy

Mine was better...

http://y2.awardspace.com/0183fr.html PNEUHKESK

Interesting and communicative, but would be suffering with something more on this topic?

tomw

If we had an unregulated free market, the various firms would not be booking their securitized loans with a zero value. They would be getting the loan service companies to pull performance reports on the actual bundles of loans to determine their true 'return' based on payment history.
The SEC(?) forced them into insolvency, no?
tom

http://www.theallegator.com/ Steel Phoenix

Government fueled the boom, and then they fueled the bust. They didn't so much regulate as manipulate. I've been laying out the series of events and now I can't help but see it as deliberate.